Tax Type
Retail Sales and Use Tax
Description
Recording studio rental
Topic
Taxability of Persons and Transactions
Date Issued
07-31-1986
July 31, 1986
Re: 58.1-1821 Application/sales and Use Tax
Dear ****************
This will refer to our meeting of February 17, 1985, in which we discussed the sales and use tax assessment issued to******** as the result of an audit by the department. Please pardon the delay since then in responding to your concerns.
As discussed in our meeting, the transactions in question involve allowing customers to use your client's recording studio. While your client may sometimes obtain talent for customers, they prepare their own scripts, supervise the talent, and exercise all creative control over the production of tapes. Your client's personnel exercise physical control over the process, however, by operating taping and production equipment, producing finished tapes and dubs, and providing their expertise and other services, for instance, sound effects.
After analyzing this situation in depth, I continue to feel that the Virginia Supreme Court's opinion in WTAR Radio-TV Corporation v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977), represents the controlling interpretation of the sales and use tax law as it relates to recording studios generally and your client's studio specifically. In fact, a review of the WTAR case and this matter reveals many similarities, particularly the fact that most of the customers involved in each case were advertising agencies. It seems logical to assume that such agencies in the case of WTAR also exerted substantial creative control over the production of tapes, yet the court found the transactions to be taxable.
Although I feel that the department's assessment is correct under the WTAR opinion, it is apparent that your client placed reliance on a 1975 letter to one of its competitors in which seemingly similar transactions were deemed nontaxable. Because reliance was placed on that letter, I find basis here for the relief of the entire assessment relating to sales of recordings. Furthermore, your client will not be held liable for the tax for the period between the department's assessment and the date of this letter.
Since meeting with you, the department has had a chance to review additional information relating to the 1975 letter. I have learned that the letter was intended to specifically address the production of tapes when the customer actually operates recording equipment, thus exercising both creative and physical control over the recording process. In such an event, the customer is essentially renting and operating a recording studio, a nontaxable transaction, thus the only taxable charge would be the sale of a blank tape from the studio to the customer. This of course contrasts with the situation in WTAR and, the situation here where the recording studio exercises physical control over the production process.
Although your client will not be held liable for past taxes due on sales of recordings, it will henceforth be expected to collect the tax on the total charge for recordings, including studio time charges and charges for other services, when its personnel exercise physical control over the taping process. As was intended in the 1975 letter, however, your client will not need to collect the tax when it merely makes its facility available for use by customers and those customers exercise both creative and physical control over the recording process. In such an event, your client would need only to collect the tax on any blank tapes sold prior to taping and any dubs produced at a later time. In addition, I would note that effective July 1, 1986, advertisements that your client produces for placement in the media will be exempted from the tax by virtue of Section 58.1-608.57 of the Code of Virginia. For your information, I have enclosed a copy of a recent tax bulletin which will explain the new advertising exemption.
Please feel free to contact the department if you have any questions or concerns or if you would like to set up a meeting to discuss this determination and its effect on your client's business.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner